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Copper - Poised For Breakout While Gold And Silver Falter - Timing Is Now

By: Michael Noonan | Sunday, February 17, 2013

One concept to keep in mind when making a trade selection is that of relative
strength. Given the choice of two or more trade candidates to buy, always
go with the strongest performer. When selling, always sell the weakest one.
This is a simple factor that often gets overlooked. Go with proven strength.
Go with anything that is proven or confirmed. The odds are then in your favor.

Given a choice of potential candidates, in this case metals, many will stick
with sentimental favorites, or choose a weaker of the two or three possibilities
on the basis that the weaker one will "catch up." Wrong, wrong, wrong. There
may be times when that can and will happen, but on balance, relative strength
will keep its edge, and anytime you can gain an edge in trading, take it.

Copper is on the verge of an upside breakout, which we think started at the
end of January, the 30th to be exact, or it can be setting up for a massive
failure. Anything can happen in the markets, but you base your decisions on
what is known and not on what may or may not happen. Could the potential breakout
fail? Yes. Based on what is known, as of Friday, the odds say No.

To the charts.

Trend and market harmony are the most important considerations. We can all
see from the monthly a series of higher highs and higher lows up until September
2011 when price entered into a triangle or wedge formation. We pose the question,
is this a breakout in the making, or is it a set-up for failure?

The reason is because we see the last three months are smaller in range to
the upside, relative to the larger downside bar, 5th from the end. It is always
important to view as many sides as possible so as not to get lulled into missing
subtle clues. In the end, you go with the stronger points that make the case.

The current monthly bar is just barely above the supply line, like a rising
sunset or a periscope about to go back down. Monthly charts are not used for
timing, and what we take away from the monthly is the trend: Up.

We admit to a myopic look at copper because it is at a specific juncture that
must prove itself as a breakout in the making. There are other considerations,
to be sure, but if the potential move fails at the starting line, other factors
become non-issues in the analysis. You can read the comments on the chart
instead of repeating them here. What we see as key are the last three weeks,
and last week in particular as the possible tipping point for higher prices
to come.

Last week was the highest volume since the end of November, and the week closed
lower than the previous two, but not very convincingly. In fact, we take the
counter-argument that the volume was net buying. Why? On increased effort,
[volume], sellers were unable to extend the range lower. Why? Because buyers
were taking everything being offered, thus preventing price from moving lower.
At least, that is our common sense POV. [Point of view].

We spoke of trend and harmony, at the outset of this analysis on the monthly.
There is consistency in all three time frames supportive of how we read developing
market activity in the present tense. All of the trading days in February
are above the supply line because of the current Mar contract, v expiring
front-month contracts on the monthly and weekly.

Again, we narrow the focus, this time to the last five TDs on the chart. 5th
bar from the end was a sell-off with no downside follow-through. What happened
to the sellers? The next 4 TDs are within that Monday range. All four closes
form a cluster with each one barely lower than the other.

Despite the increase in volume for the last 3 TDs, [Trading Days], closes
are above mid- range each bar, and the lows stayed above a 50% retracement
area for the week. There are two Buys marked on the chart. One was on the
breakout day of 30 January, [See Copper - Upside Breakout, http://bit.ly/XPGW2u,
last chart], and based upon Friday's sell-off, while gold and silver were
getting hit hard, copper held well, so a second position was added, with notice
given during the day in the Trade Recommendation section. Here is where the
relative strength factor comes in.

We also did an analysis of 60 and 20 minute charts to see the character of
each day's bar composition. Volume for each day was highest at the low, [smart
money buying from weak hands exiting/selling], and the closes were above mid-range-to-higher
on each day. If copper were to fail and not rally, volume would have been
at the highs of each day's intra day activity, which was not the case.

It was a "no-brainer" to add another position on a sell-off that demonstrated
it was not really selling off very much, and we read developing market activity
as buying, anticipating a rally soon to follow. We see copper as a "Go With" trade
until proven otherwise.

Michael Noonan is a Chicago-based trader with over 30 years in the business.
His sole approach to analysis is derived from developing market pattern behavior,
found in the form of Price, Volume, and Time, and it is generated from the
best source possible, the market itself.